Correcting the fault lines apparent in Volkswagen needs fundamental change of corporate restructuring. Ethics is subtler than the subtle that aligning Fiscal Responsibility to Ethical Responsibility is a challenge only a few companies are structured to undertake. Spreadsheet structure is an anomaly. Let us watch how Volkswagen takes it?

1. Ask not why VW failed to measure upto, Ask why am I grappled with How To
Measure? Resolve with one & the Only Corporate Management Operating System
Picture Courtesyi

2. I offer a measuring device for Management Operating System, hitherto not
available elsewhere. Please do read the Volkswagen Fiasco that highlights what
happens by not following the dictum What is Measured Gets Managed,
identifying where the fault lines exist. Ask whether there are areas within your
own structure, as the analysis pinpoints just as 378 global companies are
grappled with, begging how to measure.
Have your say, of a Management Operating System.
Volkswagen
The tussle between Profit Motive and Ethical Motive is going on since 1976
when Lockheed shook the corporate world with a cosy financial scandal. Profit
motive spurs corporate development and
growth whereas lack of ethical motive disturbs social order. To many a
corporate, ethical motive is just a name without a content. Business Ethics,
Corporate Governance, Corporate Social Responsibility, Labour Rights, Human
Rights, Environmental Rights, Anti-corruption are all a hindrance in their
technological advancement, enhancing profits for self in order towards a
selfless charity for the Public. Ethical Motive is the fundamental basis of
creating a joint-stock company corporate insists and what and how the profits
are created by any means is not the look-out for others, who are not matured
to fathom the intricacies of freedom of enterprise, economic prosperity,
innovation, technical and intellectual advancement.
Lockheed was the first major financial scandal that rocked the corporate world
in 1976, when then Secretary of State Henry Kissinger said: "The implications
for the stability of other countries could be extremely serious." Lockheed
Aircraft Corp. admitted a payoff of US$22-$24 million during a Senate
subcommittee meeting. Men in high places Prime Minister Tanaka of Japan,
Prince Bernhard of Belgium, Columbian and Italian top brass were some of the
major beneficiaries. Ashland Oil Inc. argued that securities laws do not require
public disclosure of the recipients of questionable payments that the company
says it has made in Nigeria, Gabon, Libya and the Dominican Republic.
Lockheed went further. It stated that identifying its beneficiaries could hurt its
$1.6 billion backlog of unfilled foreign orders, presumably by causing
embarrassed foreign Governments to cancel contracts, and also damage
prospects for future sales. Nor would Lockheed promise to make no more
political payments. Such payments, it said, are a normal and necessary feature
IBCM© Research 2015 Volkswagen 2 of 13

3. of doing business in certain parts of the world, are essential to sales and "are
consistent with practices engaged in by numerous other companies abroad."
2015? Rafale aircraft from France and Augusta Westland helicopter bribery
scandals continue. Between politicians and Corporate Profit Motive is aligned
to Ethical Motive, in a manner general public is yet to become matured to
understand. It is a complicated business of financing, setting up industry,
provide employment that Ireland found to its chagrin inviting DeLorean for a
futuristic Automobile.
Jargons are floated around relentlessly. Billions of dollars spent on seminars for
Corporate to understand what Ethical Motive is all about and how it could
benefit the Public. Jargons became a symbol of Corporate class and style in
management, an assurance it is different to be a leader in Corporate
Governance. Independent organisations presented prestigious awards year-in
and year-out. Volkswagen got the Best Corporate Governance for Automative
for the year 2014 in Europe as adjudged by Ethical Boardroom, reminiscent to
AAA ratings S&P, Moodys, Fitch handed over to companies like Bear Stearns,
Fannie Mae, Freddie Mac, Lehman Brothers before they collapsed, making
billions for themselves. Collectively they all stoked the passions of greed, a slow
and sure decay of morality and social order culminating in high unemployment
and Occupy Wall Street movements.
In this context after the Volkswagen fiasco one has to look at when Hermes
EOS, the stewardship division of Hermes Investment Management, calling for
an overhaul of the management and corporate governance culture at
Volkswagen.
What do you mean and to whom?
Knee-jerk reactions bring no real meaning and purpose to good intentions.
FCPA was one and Sarbanes Oxley, UNCAC another are good examples of
enacted laws put to act but turned out to be broken promises and wasteful
expenditure.
Joseph Murphy observed in an OECD Review of antibribery instruments that
Governance is not compliance and ethics, and disputes OECD's conclusion that
large multinational companies generally have adequate internal compliance
controls. He continues in the same breath: One need only look at the record at
Siemens (whose code of conduct was described as the ―read, laughed and
IBCM© Research 2015 Volkswagen 3 of 13

4. filed code), or the long, legalistic (and ineffective) code that existed at Enron to
see the great danger in such sweeping conclusions.ii
Volkswagen fiasco:
The Economistiii
wonders whether the systematic fraud by the world’s biggest
carmaker threatens to engulf the entire industry and possibly reshape it.
Volkswagen struggle was to dominate the industry globally with technical
superiority and at the same time promoting Diesel as clean and green to US,
the major market. The crux of promoting Diesel lies in better fuel efficiency,
reduced costs and lesser carbon-dioxide emissions. As Merck found out with
Viox an anti-inflammatory drug that had to be withdrawn from the market
Volkswagen found to its annoyance its Diesel cars had the side effect of turning
more of various oxides of nitrogen, known as NOx, in the air. Although NOx is
not so obnoxious as carbon-dioxide emission it has far worse local effects,
generating smogs and damaging plants and lungs, as The Economist points out.
Just like drug companies investing in R&D, it is a long-drawn out tug-of-war
between product acceptance and product liability, a costly affair for automative
industry very difficult to switch gear once the throttle is accelerated. It is a
constant struggle between Corporate and pressure group to highlight the ill-
effect of chemicals such as carcinogen found in Pepsi and Coca-Cola.
Companies go back to the lab and reformulate its sodas. As Harold James puts
itiv
, for every regulation, there is a proportionate proliferation of innovations to
circumvent it. What Volkswagen had resorted to was to circumvent the data
emission test results with a 'cheating device' software that turned off exhaust-
gas recirculation when regulators were not looking.
What is difficult to arrive at the pros and cons of material events that
determine cause and effect of corporate decisions? Let us put it this way what
Volkswagen had resorted to, if not stopped in time, would directly increase the
health hazards of people in metro cities. However, it is also an opportunity for
drug companies enhancing their drugs usage in a large scale, some of them
priced indeed very high, like anti-cancer applications. Pharma industry profits
are bound to shoot up. While regulatory authorities try reduce NOx emissions
pharma looks at it as a good opportunity, possibly lobbying to prevent steps
being considered in London and Paris to ban diesel cars altogether.
Will the Houdini act continue?
IBCM© Research 2015 Volkswagen 4 of 13

5. Corporate tries to rule its conduct by means internal to itself, by technique not
self-control. Profits not morality dominate corporate objectives and power to
operate them. Technique changes from one individual to another but modern
corporate managers are driven by passion set by their leader. Technique fails in
several cases resulting in untoward corporate disasters. Lessons are left for
case-studies and 'read, laughed and filed code' syndrome continues.
What Gets Measured Gets Managed
In a survey of 378 global companiesv
on Corporate Sustainability - A Progress
Report by KPMG International in cooperation with Economist Intelligence Unit
on Corporate Sustainability - KPMG – EIU a Progress report12 – there is a
stunning statement – Many firms are grappling with the problem of deciding
exactly what and how to measure - page 16; Deciding how to measure is more
difficult than deciding what to measure. page 29- (EIU report findings):vi
The
important point the report emphasises is 'what gets measured gets managed'.
Nothing wrong in Volkswagen in promoting diesel cars world over. It is a
business risk that could turn out to be a stroke of a genius as well as it could be
a disaster. That's part of business where short-term and long-term investment
plans are discussed, debated and strategy evolves to go ahead.
Volkswagen failed in deploying a 'cheat device' that post-facto triggers a
nuremberg syndrome, necessitating the CEO throwing in the towel. But the
culture remains, 'read, laughed and filed code' syndrome, that never gets
measured, would continue.
How to measure 'read, laughed and filed code'
syndrome?
Deciding how to measure is more difficult than deciding what to measure.
IBCM© Research 2015 Volkswagen 5 of 13

6. The fault lines - Volkswagen:
Spreadsheet Corporate Structure
Corporate Structure is based on what is convenient and measurable. The need
arose when a business starts that would suffice a petty clerk keeping a single-
entry book-keeping. Then transactions multiplied that necessitated a double-
entry book-keeping. Then business grew to accommodate several departments
and branch accounting. Keeping tack of transactions several columns arose
ensuring a trial balance is created for every debit and credit.
Corporate structure grew in the same manner. Then it stopped. Non-financial
material events were not part of a measuring device and there was never a
need that existed. Material events were noted but never was measured.
Several committees were formed mandatory or ad hoc but was not measured.
Corporate structure stops with that, merely a spreadsheet corporate structure.
KPMG-EIU survey mentions about - what gets measured gets managed - Many
companies are finding that their largest challenges stem from a lack of credible
information, metrics and standards related to sustainability. This hampers
progress in several ways.
The spreadsheet structure is limited to transactions and crucial material events
do not get measured. Volkswagen needs to establish a corporate structure
encompassing wide area of policy making to practices to covering mandatory
regulatory requirements to non-mandatory initiatives. Balance Sheet is just one
of those instruments like stock accounting and this cannot be the basis for a
corporate structure. Volkswagen should consider establishing an effective
corporate structure as proposed herein lest 'read, laughed and filed code'
syndrome is back.
Secondly, current corporate structure is entirely Object oriented. Volkswagen
structure is not designed to deliver and measure what the Subject does or
doesn't do. Risk appetite is high with a 'cheat device' trickery encouraged by
the top echelon of the company, risk culture is absent that operation force
complies to the pressure meekly.
The Subject therefore has to be the denominator in the corporate structure.
IBCM© Research 2015 Volkswagen 6 of 13

7. Upgrade Corporate Structure
Whereas Fiscal Responsibility is left at the hands of a Balance Sheet for a
company being measured, Ethical Responsibility has no platform for
measurement. In Volkswagen a few losing the jobs, promised change of
corporate culture, ready to pay compensation and enormous fines act as an
incentive to get their Corporate Governance, Risk Management, Earnings,
Accounting Quality and Management Quality [CREAM] in place. Volkswagen
Corporate Structure is to be fashioned reflecting CREAM requirements at its
best. Volkswagen must have realised the futility of receiving the Best Corporate
Governance award in 2014.
In CREAM barring E Earnings for which a spreadsheet structure is readily
available, the rest needs a platform for measuring how Volkswagen is doing.
Whereas Corporate Governance and Risk Management are part of operational
excellence in Practices, Accounting Quality and Management Quality relate to
Qualitative aspects of management that rests with Policies. There is a distinct
area of expertise and management oversee.
The third factor and the most crucial aspect of management is the silent
influence public enforces issues to be taken cognisance of by the company,
Volkswagen. The 'cheat device' would not have come to light but for the
regulatory initiatives that have come by, to be taken note of.
The three factors, Policies, Practices and the Public make up the essence of
management that the Corporate Structure should have. These three factors
should be measurable.
Taking the cue from the dictum set by Galileo Galilei: “Measure what is
measurable, and make measurable what is not so.”, Volkswagen should make
feasible to create a structure enabling the three P factors.
IBCM© Research 2015 Volkswagen 7 of 13

8. Corporate Atomic Structure
Hence a robust platform is a must. Learning from Nature we have atomic
structure well defined made up of Protons, Electrons and Neutrons, whereas
Corporate Atomic Structure is created in the same pattern of Policies, Practices
and the Public respectively. Every corporate process block consists of three
elementary particles - Policies, which has a positive charge; Practices which has
a negative charge and the Public which has no charge.
Policies and the Public are packed into the nucleus, in the same pattern as
Protons and Neutrons, whereas Practices spin around outside the nucleus. The
nucleus is by far the most significant factor in corporate management. the
Public like neutron does not influence the identity of the company but adds
mass to it. Regulatory framework, mandatory policies, human rights, labor
rights, environmental rights, anti-corruption have let the company move on
with a freedom of enterprise but add mass to the Company by compliance
interventions. A CREAM report for each process block ensures the corporate
atomic nucleus is well respected by the Executive wing of the corporate
structure, manning Practices.
Each process block consists of the three Ps of Corporate Structure - Policies,
Practices and the Public. what gets measured gets managed, says KPMG-EIU
Progress report, so Volkswagen shall institute measuring of its corporate
structure.
How to measure?
Kant raises the question whether a science of metaphysics with a logical
structure like that of the well-established mathematical and natural sciences is
possible.
Deciding how to measure is more difficult than deciding what to measure as
KPMG-EIU Progress Report reveals.
As much as the Public has no influence over the corporate identity, corporate
has no influence in the Public's initiatives ending up as mandatory regulations.
It is not easy for the Public however as it takes years to get the governments
listen to their pleas whereas Corporate lobby has a permanent presence to
thwart any attempts by the Public to disrupt normal flow of operations. Public
therefore has a say, being part of the nucleus with the Policies, and to that
IBCM© Research 2015 Volkswagen 8 of 13

9. extent their representation within the Corporate Atomic Structure must be
taken note of. Volkswagen should have known the impact 'cheat device' would
trigger from the public outcry. That leaves only two in the Corporate Atomic
Structure for direct oversee - Policies and Practices.
Policies are the end product of a creative process and Practices the starting
point of the action process unique to its set policy.
Hence entire gamut of Corporate Structure is either part of a Creative process
or Action Process. There are only these two processes for any corporate. The
end product of the creative process is a tangible substance, be it an IPR, Policy
Statement, or a strategy paper - man-made or Natural substance. The creative
process is identical to all. It starts with 1. nothing and has linear expansion step
by step - 2. conceptualisation, 3. communication, 4. formation, 5. formulation
and then declared as 6. a substance. The six stages are inevitable for Natural or
man-made substances. When Volkswagen decides to overcome the negative
impact of 'cheat software' the strategy paper that finally emerges would have
gone through the six stages of creative process. These steps are same for all
including R&D or IPRs. The six stages being known, the status of any of the
prospective substance can be located, identified and measured - within one of
the six stages - 0 to 5.
Once the substance is ready it goes through to the next stage of Action Process.
When Volkswagen is ready with a strategy paper to counter the ill effects of the
scandal, the Action Process takes over. Again the number of stages remain the
same - 0, starting from 0 which is at the stage of insentience. For example,
UNCAC once ratified but not implemented by member countries it is said to be
in a limbo - state of insentience attracting a value of 0. No action taken on an
existing policy or in other words, in 'read, laughed and filed code' syndrome.
Action process is unique to the Quality of the substance it represents.
Action Process is a series of task accomplishments in infinite succession of
finite purposes unique to the Quality of the Substance it acts upon. dT/dT -
series of Tasks accomplished in respective Time gets measured accordingly. If
Volkswagen decides to replace the 'cheat software' for 11 million diesel
vehicles, can set the daily target and scale it in six performance tasks of 0 to
100%. The rating would be when more than 100% a rating of 5 while below 0%
a rating of 0. This would be the same for all tasks including sales targets.
What it means, Creative Process and Action Process flow smoothly with a
measured performance. Project or Strategy Management is at peak when
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10. dT/dT is optimised at 5. The entire process blocks are rated to a single rating
between 0 - 5, daily. In the morning starting time it could be 2 and at the end of
the day it could be 3 or 4 depending on the daily task targets and
accomplishments.
Return on Intangible be the yardstick of Corporate
Performance
Return on Intangible defined:
1. Intangible is an effort,
2. Initiated for a specific task, creative as well as action,
3. Having an identifiable goal,
4. Enabled by the factors for the task accomplishment, and
5. Measured by defined performance criteria.
• The cause is self for every individual whatever the effort one puts in or
does not put in, with the denominator being Intangible with a unitary value of
1 and the numerator Action or Inaction with a unitary value of 1 or 0
respectively. The return on Intangible therefore is a binary value of 1 or 0.
• Each task owned by a team of 5 members, one representing Ethical
Responsibility and the 4 from Fiscal Responsibility represented by 1.
Managerial, 2. Operational, 3. Technology and 4. Finance ensure the tasks
assigned are accomplished. Though yoked together each has independent
responsibility resulting in a rating for the task on the weakest link.
• Each process block is measured and number of blocks can be combined
to arrive at a single rating for the corporate as a whole.
• Volkswagen should adopt Return on Intangible for a rapid recovery from the
current status. The number of process blocks could be many and each with a
sub-system of blocks the total number of blocks could run into thousands. Each
is identified and noted for both the processes. Wherever policies are in short-
supply they are to be created. Collectively get the current rating and move
forward to an optimised level of 5.
• If current rating is 1 and targeted is 5, the Return on Intangible throws out
the area of Inactivity.
IBCM© Research 2015 Volkswagen 10 of 13

11. Index of Inactivity
• Create an Index of Inactivity for each block by each team member. If the
current rating is 1 for a block the index of Inactivity is 4/5 i.e., 80% broken
down to each member. Even if one out of 5 has reached the level of 5 and the
rest have not, then management oversee shall pull the ones in a state of
insentience to reach the optimised level. Without each one in the team
accomplishes the given task the block would be in a limbo. Accountability by
each is tracked.
Conclusion
1. Perfection
• There is perfection in the Universe: For the universe to exist as it does requires that
hydrogen be converted to helium in a precise but comparatively stately manner -
specifically, in a way that converts seven one-thousandths of its mass to energy.
Cosmologists in their lighter moments sometimes call this the 'Goldilocks effect' -
that everything is just right. Lower that value very slightly - from 0.007 per cent to
0.006 per cent, say - and no transformation can take place: the universe would
consist of hydrogen and nothing else. Raise the value very slightly - to 0.008 per
cent – and bonding would be so wildly prolific that the hydrogen would long since
have been exhausted. In either case, with the slightest tweaking of the numbers
the universe as we know and need it would not be here. [Martin Rees]
◦ There is a perfection in the Universe and we are in it, why not follow what
Nature does?
◦ Volkswagen should engage seriously in establishing a Corporate Atomic
Structure, for Stock Accounting and Financial Accounting do not and will not
make up for an Organisation Structure.
◦ Note, HP writing off $8.8 billion on acquisition of Autonomy is not cheating,
but pure ignorance of measuring another company, of Ethical Responsibility.
2. Public Reporting
• UNCAC is a Quality document and Article 10 Public Reporting shall be adopted by
Volkswagen. The effort put in shall be publicised indicating the current status of
Rating of CREAM Report as per Return on Intangible followed by a daily rating
IBCM© Research 2015 Volkswagen 11 of 13

12. update. Governance is a dynamic function and Return on Intangible is the tracking
device of dynamic governance. Index of Inactivity will make every individual within
the company alert.
◦ Siemens 'read, laughed and filed code' should have been tracked by Article
10 UNCAC as to how the corrective action was carried out by the company and
what is the position as on today. This is the singular disadvantage of post-
scandals scenario where the perpetrating company goes scot-free, without
recourse to know what happens after the deluge.
◦ Hermes call for Volkswagen management and corporate governance culture
overhaul should focus on establishing an effective corporate atomic structure,
lest Volkswagen becomes another Siemens. The nucleus of the suggested
corporate atomic structure enhances the value system of Volkswagen. Hermes
could also take up with Ethical Boardroom how they measure Corporate
Governance.
3. Management by Creative Process and Action Process is a simple but
Natural process with the Subject-Object distinction of Qualitative and
Quantitative elements of management put in its proper perspective.
• What is truly amazing is the chasing of data as outcome of a weighted
average of quantitative benefits multiplied by quantitative probabilities that
leads to nothing, none wiser, when Subject is not brought as the denominator.
4. Correcting the fault lines apparent in Volkswagen needs fundamental
change of corporate restructuring. It is true for almost all companies.
• Ethics is subtler than the subtle that aligning Fiscal Responsibility to Ethical
Responsibility is a challenge only a few companies are structured to undertake.
Spreadsheet structure is an anomaly.
• Let us watch how Volkswagen takes it?
Jayaraman Rajah Iyer
Kodaikanal, India
+919487390439
jayar@ibcm.in
4th October 2015
IBCM© Research 2015 Volkswagen 12 of 13

13. i "Wolfsburg VWHochhaus und Kraftwerk" by Vanellus Foto - Own work. Licensed under CC BY-SA 3.0 via Commons -
https://commons.wikimedia.org/wiki/File:Wolfsburg_VWHochhaus_und_Kraftwerk.JPG#/media/File:Wolfsburg_V
WHochhaus_und_Kraftwerk.JPG
ii Mr. Joseph E. Murphy (Corporate Compliance and Ethics Professional): Review of the OECD antibribery
instruments: compilation of responses to consultation paper: 31 March, 2008.
iii http://www.economist.com/news/briefing/21667918-systematic-fraud-worlds-biggest-carmaker-threatens-engulf-
entire-industry-and
iv http://www.project-syndicate.org/commentary/volkswagen-emissions-regulatory-scandals-by-harold-james-2015-
09
v A global survey of 378 senior executives, encompassing a range of industries, and evenly split among North
America (US and Canada), Asia Pacific and Europe, with a smaller representation from the Middle East, Africa, and
Latin America. Organizations of all sizes were represented:
vi EIU report_v2_A4_Apr14. dated 15th April 2011, KPMG International in cooperation with EIU on Corporate
Sustainability - A Progress Report - (page29)